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Fed minutes hint at pause

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The US Federal Reserve is likely to pause interest rate hikes in June, which will be welcomed by markets, according to the CEO and founder of leading financial advisory and fintech deVere Group.

Fed officials were divided earlier this month on whether to continue with their interest rate hikes at their upcoming meeting in June, according to the minutes of their May 2-3 meeting, released on Wednesday.

“Several [policymakers] noted if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” the minutes read.

“Although officials agreed that inflation was still ‘unacceptably high,’ when the Fed says ‘may not be necessary’ this suggests a pause. In addition, the use of the word ‘several’ hints at a majority,” said deVere’s Nigel Green.

“Plus, Chair Jerome Powell himself indicated in speeches last week that he and his officials were open to backing a pause in rate hikes at their next meeting in June.

“They also highlight that a debt default threatens tighter financial conditions, and that a mild recession could hit later in 2023, which would signal that they opt for a pause,” Green said.

Keeping rates unchanged for the first time since early 2022 – which at 5-52.5% are the highest since 2006 – is something that will be welcomed by markets, the deVere boss affirmed.

“Markets will be buoyed as it will appear that the end of rate hikes is getting closer and closer.

“However, should this happen, investors must remember this would not yet be a pivot, it would remain a hawkish pause.”

Reasons to pause

Green added explained the US central bank would be right to pause for three main reasons.

“First, the crisis within the US financial system is still not over. There remain serious and legitimate concerns that after a string of bank failures, there could be more to come.

“The turmoil from the banking crisis is leading to a drop in bank lending, tightening the credit conditions for households and businesses. In turn, this will inevitably lead to a slowdown in economic activity and hiring.

“The Fed’s interest rate hiking agenda has tightened financial conditions which, in part, led to the banking crisis, and now the banking crisis itself is going to put the squeeze on financial conditions even more.

“Second, the time lag for monetary policies is very long. It is said that it takes about 18 months to two years for the full effect of rate hikes to filter fully into the economy,” Green added.

“Third, the bond market is suggesting a long and/or deep recession with its inverted yield curve. Yields are inversely related to bond prices.”

He said that this is typically the sign of a coming recession – an inverted yield curve has emerged roughly a year before nearly all recessions since 1960.

Green concluded that, we hope and expect that the Fed, “will do the right thing in June and pause interest rate hikes, with a view to start cuts later this year.”